HART-SCOTT-RODINO ANTITRUST IMPROVEMENTS ACT OF 1976, AS AMENDED ( HSR ACT ) (AND COMPETITION FILINGS IN CERTAIN OTHER JURISDICTIONS) SUMMARY OUTLINE

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1 January 2014 HART-SCOTT-RODINO ANTITRUST IMPROVEMENTS ACT OF 1976, AS AMENDED ( HSR ACT ) (AND COMPETITION FILINGS IN CERTAIN OTHER JURISDICTIONS) SUMMARY OUTLINE I. Purpose and Effects of HSR Act and Other Pre-transaction Competition Filings A. To notify Federal Trade Commission ( FTC ) and U.S. Department of Justice ( DOJ ), as well as competition agencies in certain other jurisdictions e.g., Canada, European Commission, Brazil, China and India of proposed transactions so they can review whether the transaction raises competitive problems. B. In the absence of competitive problems, these notification processes do not, by their terms, prevent deals, but can affect timing for the transaction to be completed. C. In many instances, these filings will not delay closing the deal because the applicable waiting periods are shorter than other legal requirements (e.g., cash tender offer HSR Act waiting period shorter than the Williams Act tender offer period). II. Basic Notification Rules in the U.S. Under the HSR Act A. The HSR Act requires notification (an HSR filing ) for proposed acquisitions of assets (note: the term assets is broadly defined and includes exclusive patent licenses), voting securities, or controlling positions in non-corporate entities if the following thresholds are satisfied (15 U.S.C. 18a(2)): 1. Size of transaction greater than $75.9 million 1 ( ) How to value stock interests in corporations generally the greater of (i) lowest closing bid price during 45 days prior to closing, (ii) acquisition price (if determinable), or (iii) fair market value (if acquisition price not determinable). How to value assets fair market value as determined by Board of Directors or acquisition price, whichever is higher. 1 Thresholds change annually. Thresholds used in this outline are effective as of February 24, Section references are to the relevant portions of the Premerger Notification Rules issued by the FTC, 16 C.F.R. 801 et seq. W/ v1

2 (c) How to value controlling interests in unincorporated entities (LPs, LLCs) acquisition price of interests being acquired plus fair market value of interests already held. 2. Size of person (only for transactions valued at $303.4 million or less) ( ): (c) (d) (e) Transaction parties meet $151.7MM person and $15.2MM person thresholds. $151.7MM person ( $15.2MM person ) means entity, together with all entities it controls, which has assets or net sales 3 of $151.7MM ($15.2MM) or more. Total assets last regularly prepared balance sheet. Net sales annual sales reflected on last regularly prepared statement of income and expense. Acquired Person is the ultimate parent entity, not just the subsidiary or assets being sold. 3. Acquisitions of options and non-voting securities are generally not reportable (see below). 4. Achieving control through shareholder agreements is not reportable if there is no acquisition of voting securities. 5. Execution of a letter of intent is generally sufficient for filing (see below). B. Joint Venture Formations special rules apply to the formation of joint venture corporations and unincorporated entities ( and ). 1. Formation of JV corporation: Acquisitions of shares may be reportable if the HSR Act s general thresholds are met (with particular rules for fulfilling size-of-person tests) and the assets to be contributed are not exempt (e.g., cash). 2. Formation of JV non-corporate entity (LP, LLC): Acquisition of noncorporate interests may be reportable if the HSR Act s general thresholds are met (with particular rules for fulfilling size-of-person tests); the acquisition confers control over the JV non-corporate entity; and (c) the assets to be contributed by other parties are not exempt (e.g., cash). (There is also a special exemption for certain financing transactions ( ).) 3 In acquisitions of non-manufacturing companies, the size of person test for the acquired person is whether it has $15.2MM or more in assets or $151.7MM or more in sales. 2

3 C. Filing Thresholds $75.9MM; $151.7MM; $758.6MM; 25% (if value of voting securities to be held is greater than $ billion); and 50% (irrespective of value) ( 801.1(h)) 1. Must have present good faith intention to cross threshold within 1 year. 2. Shelf filings indicate higher threshold: definite intent to cross one threshold, and possible intent to cross a higher threshold within 1 year. 3. A filing becomes stale after one year unless threshold is crossed. If threshold is crossed within one year, it may be re-crossed as many times as desired for 5 years. 4. Selection of one or more thresholds can be a strategic decision as to the message one wants to send to a target. D. Waiting periods (15 U.S.C. 18a; 15 U.S.C. 18a(e); , , ) 1. General Principles (c) (d) (e) Two statutory waiting periods: (i) initial waiting period; and (ii) Second Request waiting period. 4 Second Request waiting period is tolled until the relevant party substantially complies with requests. Both U.S. agencies in recent years have taken aggressive postures on substantial compliance issues for all types of transactions. Any waiting period scheduled to expire on a weekend or holiday is extended to the next business day. Early termination of the waiting period is frequently granted if there is no competitive issue. Early termination must be requested in writing. The parties to non-public transactions frequently do not request early termination because early termination is public information, with notice available to the public (from the FTC s Press Office) the business day after being granted. Early termination is also reported on the FTC s web site (one business day after being granted) and in the Federal Register. Parties may be asked to enter into a timing agreement to extend agency review of transaction. 4 The U.S. antitrust authorities have the ability to extend the initial waiting period by issuing a Request for Additional Information and Documentary Material ( Second Request ) prior to the expiration of the initial waiting period. 3

4 2. Cash tender offers (all cash): Initial waiting period 15 calendar days from acquiring person s filing. Second Request waiting period 10 days from acquiring person s substantial compliance. Target s compliance has no effect on waiting period, but must be made within reasonable time period (to ensure receipt of the information, reviewing agency often mirrors its second request to hostile targets with compulsory process (e.g., CID, subpoena) specifying a firm return date). 3. Other non-consensual acquisitions (open market purchases, stock purchase agreements with third-party shareholders, stock or mixed tender offers): Initial waiting period 30 days from acquiring person s filing. Second Request waiting period 30 days from substantial compliance by both parties (i.e., target s compliance affects waiting period), except for stock or mixed tender offers (in which target s compliance has no effect on waiting period, but must be made within reasonable time period as for cash tender offers). 4. Consensual transactions (mergers, lock-ups, stock or asset purchase agreements with the target): 30 days from both parties filings. Second Request 30 days from substantial compliance by both parties. 5. Multiple transactions multiple waiting periods. 6. Bankruptcy proceedings for asset sales under 11 U.S.C. 363, initial waiting period of 15 days from both parties filings, Second Request waiting period of 10 days from acquiring person s substantial compliance. Under a plan of reorganization, initial and Second Request waiting periods of 30 days (if not consensual, waiting period begins with acquiring person s filing). E. When can you file? ( 803.5) 1. Tender offers after tender offer has been publicly announced, and target has received formal notice letter. 2. Other non-consensual acquisitions after target has received formal notice letter. 4

5 3. Consensual transactions after parties have signed letter of intent or agreement in principle. Fairly minimal requirements. 4. Bankruptcy signed agreement or letter of intent is not required. F. Overall Timing for HSR Clearance 1. Depending on the parties, it typically takes 1-2 weeks to complete the HSR form, which can be started prior to signing a definitive agreement (and even filed with a Letter of Intent). 2. For a transaction that raises no competitive issues, the FTC and DOJ will either terminate early (if requested) the waiting period or allow the waiting period to expire after the initial waiting period. Therefore, transactions that only require U.S. premerger filings can typically close within 45 days of signing if they raise no competitive issues. In case of early termination, public disclosure of the early termination is made by the relevant agency; if there is no early termination and the waiting period simply expires, no public disclosure is made by the agencies. 3. For transactions raising competitive issues, the reviewing agency may issue a Second Request. A Second Request will generally delay closing by between two months and a year. The exact length of delay will depend on the number of competitive issues raised by the transaction, the size of the parties, the number of responsive documents they are likely to have, and the parties willingness and ability to comply with the second request and put the government under time pressure. 4. Whether a full response to the Second Request will be required depends on a number of factors, including the content of the responsive documents, the clients willingness to spend the necessary resources, the clients willingness to sell assets or businesses to resolve the government s concerns, and the need to close by a certain date. 5. Occasionally, and particularly in high profile transactions, the FTC and DOJ will argue about which agency should review the transaction. Such a clearance battle can result in the transaction parties being asked to pull their notifications and re-file so as to restart the waiting period (the filing fee need not be repaid). The parties will typically agree to this request only if there is a reasonable chance that at the end of the new initial waiting period, the reviewing agency will not issue a Second Request or, at a minimum, will be able to limit the scope of the Second Request. G. Important Elements of HSR Notification Form 1. Item 2(c) Filing threshold 2. Items 1, 3 Description of parties and transaction 5

6 3. Items 4, 4 SEC Central Index Number, annual reports and annual audit reports 4. Item 4(c), 4(d) Documents relating to the transaction that discuss competition, competitors, markets, market shares, potential for sales growth, potential for expansion into new geographic or product markets, synergies, or efficiencies; Confidential Information Memoranda or equivalent; and documents prepared up to one year prior to filing by third party advisors (e.g., investment bankers, consultants) relating to subject matter above 5. Item 5 Most-recent-fiscal-year revenues by NAICS code 6. Item 6 Subsidiary, shareholder, minority holding, and associate information 7. Item 7 Geographic sales information for overlapping NAICS codes 8. Item 8 Past acquisitions by acquiring person in overlap codes III. Exemptions Under the HSR Act A. All exemptions are subject to , which provides that transactions that are structured as device(s)... for the purpose of avoiding the HSR Act shall be disregarded and the obligation to comply shall be determined by applying the Act and these rules to the substance of the transaction. 1. Enforcement activity has significantly reduced scope of the following exemptions: (c) (d) investment-only exemption; the use of put/call options (but note that the FTC has recently sanctioned some uses of put/call arrangements to avert an HSR filing); acquisition vehicle exemption ( partnership loophole ); and misallocation of the purchase price between foreign and U.S. assets 6

7 2. Penalties for non-compliance: $16,000 for each day the violation continues 5 other equitable relief (i) disgorgement of profits (e.g., Rales/Interco) 6 (ii) injunctions (not yet sought, though certain Commissioners have voted for it as an appropriate remedy) (iii) divestiture (e.g., Coastal) 7 3. The standards governing when an enforcement action will be brought are not well defined and have shifted over time. First-time violators are often admonished without a fine, but the agencies typically deal severely with repeat offenders. 8 B. Acquisitions of certain classes of assets or the voting securities of entities that hold only certain classes of assets ( through 802.5). Under these rules, acquisitions involving REITs will usually be exempt from the reporting and waiting period requirements of the HSR Act no matter how large the transaction. With certain limitations, acquisitions of the following classes of property are now exempt: 1. Goods or realty acquired in the ordinary course; 2. New facilities; 3. Unproductive, office, residential, retail rental space (e.g., shopping malls), 9 or agricultural real property; 4. Hotels and motels, golf courses, swimming pools, and tennis clubs; and 5 Note that, in its prosecution of Smithfield Foods, the DOJ indicated that an HSR Act violator cuts off its liability by selling down to a non-reportable position of voting securities. See Complaint, United States v. Smithfield Foods, Inc., Civ. Action No. 1:03CV00434 (HHK), 20-21, (Feb. 28, 2003). 6 See United States v. Equity Group Holdings, Trade Cas. (CCH) 69,320 (D.D.C. 1991). 7 See United States v. The Coastal Corporation, Trade Cas. (CCH) 66,425 (D.D.C. 1984). 8 See United States v. William H. Gates III, Civ. Action No. 1:04CV00721 (CKK), (May 3, 2004). 9 Note: As illustrated by Simon Properties, the exemption of a transaction from HSR Act does not mean that the agencies are precluded from challenging a transaction under the antitrust laws. In the Matter of Simon Property Group, Inc., FTC File No , Docket No. C-4307 (January 21, 2011). 7

8 5. Carbon-based mineral reserves not exceeding $500M. C. Investment-only ( 802.9) 1. 10% or less; 2. completely passive (e.g., no board seats); 3. non-competitor (see, e.g., Pennzoil 10 ); and 4. enforcement activity may be brought where there is an alleged overnight change in intent (e.g., Smithfield Foods, Inc.; Manulife Financial Corp.), 11 when an officer or director exceeds a notification threshold (e.g., United States v. William H. Gates III), 12 or when an activist investor seeks to influence management of the acquired company prior to filing. 13 D. Institutional investor ( ) 1. eligible institutions are listed in the rule; 2. 15% or less; 3. completely passive, ordinary course of business; 4. non-competitor and not institution not of the same type; and 5. certain pension funds are coming under scrutiny because of their increasing attempts to influence management. E. Acquisitions valued at $303.4 million or less by uncontrolled acquisition vehicles ( (e), 801.1) 1. vehicle is not controlled by any other entity; control is defined as corporation 50% of voting securities or 50% of Board of Directors, or partnership or LLC 50% of profits or assets upon dissolution; 2. no regularly prepared balance sheet and no annual sales; 3. no assets other than stock of target or cash to be used for acquisition; United States v. Pennzoil, Trade Cas. (CCH) 70,760 (D.D.C. 1994). United States v. Smithfield Foods, Inc., Trade Cas. (CCH) 76,880 (D.D.C. 2010); United States v. Manulife Financial Corp., Trade Cas. (CCH) 74,426 (D.D.C. 2004). 12 United States v. William H. Gates III, Trade Cas. (CCH) 74,417 (D.D.C. 2004). 13 United States v. Biglari Holdings, Inc., Trade Cas. (CCH) 78,409 (D.D.C. 2012). 8

9 4. no mixing with stock of other issuers; and 5. enforcement actions where FTC finds structure is a scheme to avoid HSR (A&P, Rales/Interco). 14 F. Intraperson exemption shells, stock repurchases, subsidiary asset drop-downs, etc. (15 U.S.C. 18a(c)(3), ) 1. Acquiring and acquired persons must be the same (i.e., already 50% owned or more. 2. Also applies to asset contributions during the formation of a joint venture corporation or unincorporated entity. G. ESOPs ( ) H. Foreign assets and foreign persons 1. Persons buying foreign assets exempt unless more than $75.9MM sales in or into U.S. ( ). 2. Persons buying foreign securities exempt unless foreign issuer (or issuers if all acquired from same acquired person) has assets in the U.S. or sales (most recent fiscal year) in or into the U.S. of over $75.9MM ( , ). In addition, if the acquiring person is foreign, the acquisition is exempt unless it confers control over the foreign issuer. 3. Foreign persons buying foreign assets/securities even if H.1 and H.2 are not applicable, still exempt if the transaction is valued at $303.4MM or less, and both acquiring and acquired persons are foreign with aggregate assets in the U.S. and sales (most recent fiscal year) in or into the U.S. of less than $166.9MM ( , (c)). I. Options and Convertible Voting Securities/Nonvoting Preferred ( , 801.1(f)) 1. Acquisition is exempt if no present right to vote for directors ( ). 2. Not reportable until conversion or exercise of option ( ). 3. Put/call options have previously been challenged when option is granted by an agent of the raider who has presumably acquired the stock at or after 14 United States v. Tengelmann Warenhandelsgesellschaft, Trade Cas. (CCH) 68,623 (D.D.C. 1989); United States v. Equity Group Holdings, Trade Cas. (CCH) 69,320 (D.D.C. 1991). 9

10 the grant of the option (e.g., Belzbergs, Trump, Wickes) 15, but note that the FTC has recently sanctioned some uses of put/call arrangements to avert an HSR filing. J. Other 1. Federal agency approvals (15 U.S.C. 18a(c)(6); 802.6). Airlines are no longer exempt Utilities not exempt 2. Bank mergers (15 U.S.C. 18a(c)(7), (8)). Under Gramm-Leach-Bliley, if part of a Bank Holding Company transaction is subject to section 4 of the Bank Holding Company Act, the parties must file the 4(c)(8) application with antitrust agencies even though the transaction is also subject to section 3 of the BHCA. There may also be an HSR filing if the target has more than $75.9 million of non-banking businesses. Note also that the exemption does not apply to acquisitions in excess of $75.9 million, but less than 5%; these transactions are still HSR reportable. The Gramm-Leach-Bliley Act subjects all non-bank acquisitions by Financial Holding Companies to the HSR Act, even if part of a bank acquisition. 3. Debt work-out ( ). Acquisitions of assets or voting securities pursuant to a bona fide debt work out. Bright line rule that swaps of debt obtained after bankruptcy filing made or intention to make filing had been announced are not entitled to exemption. 15 United States v. First City Financial Corp., Ltd., Trade Cas. (CCH) 67,967 (D.D.C. 1988); United States v. Donald J. Trump, Trade Cas. (CCH) 67,968 (D.D.C. 1988); United States v. Wickes Companies, Inc., Trade Cas. (CCH) 67,966 (D.D.C. 1988). 10

11 4. Financing transactions using a non-corporate entity as a temporary investment vehicle ( ). IV. What transactions should a filing cover? A. Each possible transaction must be described in Item 3 and the Affidavit/ Declaration in order for the filing to be effective for each transaction. Examples: 1. If transaction is a cash tender offer, is there a second step merger? 2. Is offeror reserving the right to make open market purchases? 3. Are there stock purchase agreements with third party shareholders (third party lock-ups)? 4. Are there stock purchase agreements with the target? 5. Are there asset lock-ups with the target? B. Exchange offers ( 801.2(e)) If stock of the acquiring person is to be acquired by third party shareholders of the target as part of a merger or exchange offer, additional HSR filings may be required with respect to those third parties (often including officers or directors of the target who will continue in those roles with the acquiring person post-merger). C. Secondary acquisitions ( 801.4) An additional HSR filing may be required if the acquiring person indirectly acquires a non-controlling interest in a third party corporation as a result of the primary acquisition. D. Filing Fee $45,000 (if acquiring person will hold more than $75.9MM in assets and/or voting securities, but less than $151.7MM); $125,000 ($151.7MM up to $758.6MM); $280,000 ($758.6MM or more). V. Competition Notifications in Other Jurisdictions A. Premerger Notifications One of the U.S. s most successful exports 1. about 70 countries may require filings 2. rules vary widely (e.g., Australia voluntary filing, no waiting period (and thus no suspensory effect); numerous countries notify whenever, but wait to close until approval, which must come within specified period) B. Many jurisdictions follow either a U.S. or the European Union pre-merger notification model. In the EU: 11

12 1. Thresholds are based on global sales and EU sales, with carve-out for transactions involving companies that each have more than ⅔ of sales in a single EU country. 2. Very detailed filing (Form CO) that can take a month or more to put together in draft form. Once a draft is complete, it is submitted to the regulators for comment. Sometimes multiple drafts are submitted (and there are several meetings with regulators) before the regulators agree to accept a final version. This process can take two months or more. (A simplified procedure can expedite this process for certain transactions that raise no competitive concerns.) 3. Initial waiting period of one month, extended for holidays in the interim. If the regulators have concerns, will go into a second phase, which extends the waiting period for another four months, again extended for interim holidays. 4. Prior to the end of the third week, if there are potential competitive issues, the parties may submit undertakings to resolve those issues so as to avoid a second phase investigation. The offering of undertakings extends the first period to six weeks, exclusive of interim holidays. 5. For global transactions that require notification in the EU, but do not raise competitive concerns (or for which the parties are willing to do whatever it takes to resolve the concerns in a first phase), it may take 1.5 to 4 months from signing to get the approval necessary to close the transaction. The exact amount of time depends upon how much work is done to complete the required notification prior to signing, with 1.5 months possible only if a draft notification is submitted to the European Commission at the time the deal is announced. 6. For transactions that raise concerns and result in second phase investigations, clearing the EU can take seven to nine months. VI. Premerger Rules of Engagement A. Gun jumping is illegal under the antitrust laws in general and under the HSR Act in particular. 1. Section 1 of the Sherman Act provides for criminal penalties for certain behavior, e.g., price fixing, allocating customers, etc., even among parties planning to merge. 2. HSR Act prohibits the shift of beneficial ownership prior to clearing the applicable HSR waiting period. 3. Section 5 of FTC Act provides for equitable relief. 12

13 4. Management and consulting agreements are of particular concern. B. Exchange of certain types of information between certain individuals may violate the antitrust laws. 1. In general, whatever a business person would consider competitively sensitive should be provided only to a narrow group of people subject to a confidentiality agreement. 2. Examples of sensitive information include current price information, customer lists and prospective bidding plans, detailed cost information, production trade secrets, etc. 3. Persons that should generally not receive competitively sensitive information include marketing, pricing, operations, etc. people. C. Contractual terms in the transaction documents may violate the antitrust laws. 1. Limitations on interim business activities must be reasonable and allow for continued competition between the acquiring and acquired persons (e.g., Computer Associates) Limitations on future competition, particularly by the acquiring person against retained businesses or sellers of the acquired person, must be narrowly tailored (e.g., limited to uses of the acquired assets and information in competition with the buyer) and reasonable under the circumstances. 3. Even if the contractual terms are not illegal per se, the acquiring person can run afoul of the antitrust laws by using such terms to exercise operational control of the acquired person prior to the merger closing. See, e.g., Smithfield Foods, Inc United States v. Computer Associates International, Inc., Trade Cas. (CCH) 73,883 (D.D.C. 2002). 17 United States v. Smithfield Foods, Inc., Trade Cas. (CCH) 76,880 (D.D.C. 2010). 13